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5 Reasons to Smile When You Hear HSA

| June 20, 2016
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If you could save 25 cents for every dollar you set aside for healthcare expenses, would you do it? What if I told you that was only the tip of the iceberg when it came to the benefits of a Health Savings Account (HSA)? While this type of savings account is becoming more mainstream, its benefits are not always well understood. If you're eligible to contribute to an HSA (see number 4 below), I’m about to spell out why you absolutely start socking away dollars into an HSA:

  • Contributions lower your taxable income.

To say that in a way non-geeks can understand, Uncle Sam will charge you less on your income taxes if you contribute to an HSA. Say you pay an average tax of 25% on your federal income taxes. If that’s the case, you’ll save 25 cents for every dollar you contribute to your HSA. That’s a pretty sweet deal.

  • You WILL have medical expenses.

Even if you’re a healthy middle-aged person who rarely goes to the doctor, it can be said with a high degree of certainty that at some point in the remainder of your life, you will have medical expenses. And often, when a large medical need hits, it comes with a big bill. Why not have a separate savings account in place for just such a need? And remember, you saved money on your taxes by setting those savings aside! Health care expenses in retirement are overwhelming to some retirees. I believe most of them would tell the younger generation to begin setting money aside now. An HSA is a perfect way to do just that.

  • The money you’ve saved in your account can be invested and will grow tax-free.

What’s even better, is that when you withdraw the funds to pay qualified medical expenses, you don’t may any tax upon withdrawal either. Depending on the type of retirement account, you may avoid taxes on the front end or the back end, but there is no retirement account that allows you to benefit from a tax perspective on BOTH sides of the equation like the HSA. This benefit should not be overlooked—there is NO other long-term account that allows you to save on your taxes upon contribution, during the growth period and upon qualified withdrawal.

  • For 2016, an eligible individual can contribute up to $3,350, and $6,750 can be contributed into a family plan.

For a healthy individual, those savings can begin to compound, creating a nest egg specifically for medical expenses. To be eligible to contribute, you must be covered by a high-deductible health plan (HDHP). You can open an HSA on your own—it doesn’t need to be sponsored by an employer, unlike some other medical savings accounts.

These include: prescription glasses and contacts, fertility supplies, Lasik surgery, hearing aids, first-aid supplies and high SPF sunscreen. HealthEquity has a great tool that is searchable and provides details on qualified, non-qualified and potentially qualified expenses. Payflex tool.

HSAs will not make sense for everyone. But if you have a high-deductible health plan, or are considering switching to one, the benefits of an HSA are well worth seeking out.

Considering the expenses related to health care is an important piece of your financial planning. Visit our financial planning page to learn more about how we can help.

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